Our assets are very important to us, but have you thought about how your assets are titled? When someone dies, the way assets are titled may affect many things, such as who has access to or will inherit those assets, whether those assets need to be probated, and whether they are includible in your estate. In this article, we will talk about the different ways to hold title and the consequences of those choices.
To begin with, title refers to a legal right of ownership to a piece of property. The different ways to hold a title can, in the event of the owner’s death, dictate whether the asset belongs to the estate and is subject to probate or if the title supersedes the will in favor of distributing to specific beneficiaries.
A common account that becomes part of a decedent’s estate is an individual bank account or sole ownership in property. The individual solely holds title to the account and can use it throughout their lifetime. It is later distributed per the will and subject to probate, which is the legal process to prove the will’s authenticity. To avoid probate, an individually titled account can have a beneficiary designation, commonly known as a payable on death or transfer on death. This type of title holding supersedes a will because a beneficiary is already named to inherit the account. The other benefit of this type of designation is that the beneficiary will have immediate access to this account when you die and will have the ability to use the funds to pay necessary expenses and debt on your behalf of your estate. In addition, the beneficiary does not have access to the account while you are still alive.
In contrast to sole ownership, assets can be held among multiple people through joint tenancy with right of survivorship. The multiple owners, who do not need to be married or related, have full access and ownership of the asset to enjoy and use. When a joint tenant dies, the entire asset gets a step-up in basis (in most cases) and automatically passes to the surviving joint tenants, avoiding probate. In this type of joint tenancy, however, creditors can petition the court to divide the property and force a sale.
Another type of joint title holding is tenants in common, or TIC. This type of title holding allows the holders to own the asset in proportion to the amount they contributed. In contrast to joint tenancy with right of survivorship, the deceased’s interest does not stay with the survivors but is distributed according to the will and subject to probate. A step-up in basis only applies to the decedent’s portion of the property. Creditors can also place liens but only against the specific owner’s portion of the property. A lien is the right to possess property until debt is discharged.
An additional joint ownership title method is a tenant by entirety. This is only available to married owners, who are considered one person. The surviving spouse has the right of survivorship and the title holding supersedes a will.
Assets may also be held in a living trust. A trust is a legal entity established to control assets. The trust is technically held by the trustee whose actions and powers are dictated by the trust agreement. Assets titled under the trust name avoid probate as they are removed from the decedent’s probate estate and placed into the trust. At your death, the trust assets are includible in your estate and receive a step-up in basis. They will then be distributed to your trust beneficiaries as prescribed by the trust document.
As you can see, there are many different ways to hold title to assets. It is important to weigh the pros and cons in order to achieve the desired consequence for specific situations and to take into account possible future events. If you have any questions regarding titles and beneficiary designations, please feel free to contact us at (858) 558-9200.